Option trading strategy - short naked options.

TerenceFung wrote a column · Mar 18 00:00

As an option writer/seller, we received a premium upon selling. We are effectively selling an 'insurance' to the buyer, with a promise that we will buy/sell based on the strike price. Our aims is to let the option expired worthless, out of money (away from strike price), upon expiration date. So, our buyer will not make claim on the 'insurance', and we get to keep the premium as profit.

Disclaimer: I am not a licensed financial advisor and I do not help other to invest. I can only share what I did for myself. Your money is your sole responsibility. This is NOT FINANCIAL ADVICE. Do your own due diligence. Please stop reading if you do not accept this disclaimer.

This strategy utilized the idea of time decay, high probability of OTM, and multi-timeframe analysis on trend.

Find any OTM option of any time, you will always see the option price falls as nearing to expiration.

Option trading strategy - short naked options.

Prerequisites

📌 Understand the concept of swing low and swing high. To identify ideal strike price and trend.

📌 Understand technical analysis using MACD or price action. To identify price momentum.

📌 Understand time decay in option trading, how option price behave nearing expiration. To have confidence in short selling option.

📌 Understand the basic and requirements in shorting option. For example, cash reserves for cash secured put.

Entry

Daily chart as trend bias, 4hr chart as action bias

When MACD shows bullish momentum on daily chart, then it is consider it is uptrend, otherwise downtrend.

When MACD shows bullish momentum on 4hr chart and daily chart shows uptrend, then can consider to sell put option. When MACD shows bearish momentum on 4hr chart and daily chart shows downtrend, then sell call option.

When bullish, buy call or sell put; When bearish, buy put or sell call.

Both chart must align with the same direction before any action. Otherwise do nothing.

Disclaimer: MACD is a technical indicator. Just like any technical indicators, it gives general bias based on statistics but does not guarantee result.

🐂Example for bullish signal

For daily chart, MACD is bullish as green histogram is forming.

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For 4hr chart, MACD is bullish as well.

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In this case, the direction is bullish bias. We can take advantage of this by selling put option.

🐻 Example for bearish signal

For daily chart, MACD is bearish as red histogram is forming.

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For 4hr chart, MACD is bearish as red histogram is forming.

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🐵Example for no direction

For daily chart, the MACD is bearish.

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For 4hr chart, the MACD is bullish as green histogram is forming. When MACD is below zero, this bull is consider weak.

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In this case, there is no clear direction. Hence do nothing.

Here is basic usage of MACD histogram on identify direction bias. For other methods to identify direction bias includes MACD against zero line, or MACD divergence, one can research from the internet.

Here is using MACD as trend indicator. One may use other technical indicators of preference to identify direction bias.

Expiration date range should be around 5-10days.

Strike price is depends on probability (to hit strike price), conservatively can be around 5-10%, depending on individual's risk appetite.

Exit

If both daily chart and 4hr chart shows reversal, and probability to hit strike price increased above 25% or losing 100% of target profit, then should close the losing position. This is beyond salvage.

Risk management

1. Trading Fee

The trading fee for an option is about $1. To make the trade worthwhile, one can aims profit target at USD10, after minus trading fee.

For example, the unit price is lower than 0.1, then one might sell 2 unit of options, resulting in premium of USD20. The goal is to make at least USD10 premium as a set. One can trade multiple sets depending on individual's risk appetite.

2. Cut loss vs Profit making priority

In the case you need to cut loss and catch a new profit, always cut loss first. You will never know how much the loss can eat into your new profit.

3. Reversal

Since this strategy holds short option until its expiration, sometimes reversal can happens and spike up the option price. As a result, the option could be at a loss.

If your option follows the direction on daily chart (e.g short put on bullish daily chart), but 4hr chart shows reversal, then there is a chance for time decay to win over the short term fluctuation.

Depending on the situation, personally I would DCA into it, increasing half of previous price. For example, I sold an option at USD 0.10, Then I would DCA at USD 0.15, and next is 0.22.

4. Earnings spike

The day before earnings release, both call and put will price up exceedingly due to many speculations. After the earning release, both call and put option will return to their 'senses'.

Problem is if the short option stands on the wrong direction of the QR (e.g. short call and daily chart gap up due to QR), then you might end up at loss. In such case, the best move is to cut loss and keep whatever left. Otherwise, you can hold until expiration.

5. Naked vs Protected

Based on this strategy, it is all about selling naked option, meaning no protection. The edge of the strategy is about high probability of OTM and time decay, at the cost of low profit. Buying protection may be wise but hurt the profits.

Example of short naked call

To implement protection, one can study on vertical spread. It is basically a buy and a sell of an option at the same time but different strike price. Resulting a fixed loss.

P/L sharing for case study

Example of P/L as of 20250309

$Direxion Daily TSLA Bull 2X Shares (TSLL.US)$ overall bearish at the time, and I sell a lot of calls. On 4hr chart, it shows some weak bullish momentum and I sell some puts for counter trend trades.

Counter trend trade is very risky plan. By my personal experiment, it is not working very well in this strategy.

Daily chart

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4hr Chart

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P/L as of 20250314.

I am extending the strategy to other stock, beside TSLL.

NOTE: DOCU option is sold at 0.3 and buyback at 0.12. I closed it due to earnings spike.

P/L as of 20250318

Conclusion

This is a strategy is shorting option for premium. High win rate and trade off with low profit. To compensate the low profit, one can sell more options. Selling more options requires larger pool of cash reserves.

This strategy works for any stock in trending or side way. It has limitation in handling high volatility events.

Please like and share your thought for this post. Please let me know what to include next for better post. Thanks!

Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only. Read more

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BOOMbilily : Great post! I really admire how you’ve laid out the risks and rewards of short naked options so clearly

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BSqueen : How do you typically adjust your strategy during high-volatility periods, like around FOMC meetings or major economic events? Thanks for sharing

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Keiith : how do you decide on the exact strike price when selling options? Is there a specific probability threshold you aim for?

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Handiyanan : Great postI’d love to hear more about how you handle extreme market volatility or black swan events. Do you ever use protective puts or spreads as a hedge?

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TerenceFung OP BOOMbilily : thanks! you are so kind!

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TerenceFung OP BSqueen : I would just cut loss or close position before the events. In the example, I closed a position due to earnings spike. This strategy only make sense when trending or side way, any form of surprise event will break it.

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TerenceFung OP Keiith : I decide the strike price by the probability threshold 5-10%. As for when to choose nearer 5% or 10% is highly depends on individual's risk appetite and price momentum.

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TerenceFung OP Handiyanan : hm... I do short both call and put when trend goes side way, that effectively a hedge. Sometimes extreme market volatility comes as a surprise, nobody can predict that. Cut loss if no way to avoid it.

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MyTradeHunter : its great to use these indicators. but after a while just normal support and resistance lines will work nicely...anyway the probabability of trade can be structured with 70% probability on onset. Another thing, i will not do 0.10-0.20 trades with short expiry on those volatile shares like smci. it gaps up and down too often. you will take many trades to cover a losing trade back. long term, just work on ETFs will be safer although premiums are not as good as stocks. Continue the great work...

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MyTradeHunter : 40-45 days DTE trades monthly expiring options with premiums 1.5-2% of the strikes shld be the target for naked puts. IV rank above 20. probability of profit 70% above which should put tge strikes around delta 20. if you do strangle strategyie. selling a put and a call, move them down to delta 16 strikes. this is more or less the things u need to know. 🫡

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